Assume today is December 31, 2013. Imagine Works Inc. just paid a dividend of $1
ID: 2811056 • Letter: A
Question
Assume today is December 31, 2013. Imagine Works Inc. just paid a dividend of $1.30 per share at the end of 2013. The dividend is expected to grow at 15% per year for 3 years, after which time it is expected to grow at a constant rate of 6% annually. The company's cost of equity (rs) is 9.5%. Using the dividend growth model (allowing for nonconstant growth), what should be the price of the company's stock today (December 31, 2013)? Round your answer to the nearest cent. Do not round intermediate calculations.
$ per share
Explanation / Answer
D1=(1.3*1.15)=$1.495
D2=(1.495*1.15)=$1.71925
D3=(1.71925*1.15)=$1.9771375
Value after year 3=(D3*Growth rate)/(Cost of equity-Growth rate)
(1.9771375*1.06)/(0.095-0.06)
=$59.87902143
Hence current value=Future dividends*Present value of discounting factor(9.5%,time period)
=$1.495/1.095+$1.71925/1.095^2+$1.9771375/1.095^3+$59.87902143/1.095^3
which is equal to
=$49.91(Approx).